From 2013-2017, revenue and adjusted earnings-per-share rose at a compound annual rate of 11% and 16%, respectively, thanks in large part to the success of Humira.

Last year was another strong one for the company. Humira revenue increased 16% in 2016, to $16 billion. Thanks to Humira, AbbVie’s revenue and adjusted earnings-per-share increased 13% and 12%, respectively, for the year.

Growth Prospects

AbbVie has continued to post strong operating results in 2017, and has potential for growth moving forward.

In the third quarter, total revenue increased 8.8%, to $7 billion. Growth was due largely to Humira, which increased sales by 15% for the quarter. Adjusted earnings-per-share rose 17%, an excellent earnings growth rate.

For 2017, AbbVie expects earnings-per-share in the range of $5.53 to $5.55. At the midpoint of guidance, management expects 15% earnings growth this year.

Humira is a multi-purpose drug that is used to treat a variety of conditions, including rheumatoid arthritis, plaque psoriasis, Crohn’s disease, ulcerative colitis, and more.

Humira is the company’s most important growth driver, but this stands to change. AbbVie began losing patent protection on Humira in the U.S. in 2016, and it is scheduled to go off patent in Europe in 2018.

This is a significant risk for AbbVie, since Humira itself represents two-thirds of the company’s revenue. AbbVie management believes Humira will continue growing at a high rate through 2020. After that, the company expects new products to take the lead.

AbbVie expects Humira will still generate approximately $18 billion of revenue by 2020. Beyond 2020, the company expects to generate $25-$30 billion from its suite of new drug launches to more than offset any Humira declines.

The company expects to launch 20 new products or indications by 2020. It also is preparing to cut costs, which should result in expanding operating margins by 1% to 2% per year.

Combined, these growth catalysts are expected to result in double-digit adjusted earnings growth through the end of the decade.

Competitive Advantages & Recession Performance

The most important competitive advantage for AbbVie, and any pharmaceutical company, is its patent portfolio. Pharmaceutical giants need to spend heavily to innovate new drugs and therapies, when one of their blockbusters loses patent protection.

To build its pipeline, AbbVie has accelerated research and development spending, to prepare for the loss of Humira. R&D expense in the past few years is below:

2014 research-and-development expense of $3.3 billion

2015 research-and-development expense of $4.3 billion

2016 research-and-development expense of $4.4 billion

Fortunately, this spending is starting to show positive results, as AbbVie has a robust pipeline.

It is unclear how AbbVie itself performed during the Great Recession, as it was still part of Abbott Laboratories. However, it stands to reason the company would hold up fairly well during the next recession.

Prescription drugs and medical supplies are necessities, with stable demand. Consumers often cannot choose to go without healthcare, even when the economy is in a downturn. As a result, investors can reasonably assume AbbVie’s profits would experience a modest decline during a recession.

Valuation & Expected Returns

At the midpoint of AbbVie’s earnings guidance for 2017, the stock is currently trading for a price-to-earnings ratio of 17.

AbbVie is valued considerably below the S&P 500 Index average price-to-earnings ratio of approximately 25. However, the stock is valued at a significant premium to its historical average in the past five years (10-year data is not available, as AbbVie was not a publicly-traded company until 2013).

In the past five years, AbbVie has traded for a price-to-earnings ratio of 14.9. This means the stock is valued at a premium of approximately 14% to its five-year average valuation.

It could be argued AbbVie deserves a higher valuation than it currently holds, given its high-quality business and strong growth prospects. Still, with a high reliance on Humira and a valuation that is 14% above its average level, AbbVie appears to be fairly valued.

This means going forward, AbbVie’s returns will be the result of earnings growth and dividends. The good news is, there is still the opportunity to generate satisfactory returns, because the company is still growing earnings and dividends.

A breakdown of potential future returns is as follows:

3%-5% revenue growth

1% margin expansion

2% share repurchases

3% dividend yield

In this forecast, AbbVie’s total shareholder returns would reach 9% to 11% each year, not including any impact from a rising or falling price-to-earnings multiple.

Even with a relatively modest forecast of low-to-mid single digit revenue growth, there is a reasonable chance AbbVie’s total annualized returns could reach double-digits.

Final Thoughts

AbbVie is a very high-quality business, with a strong pharmaceutical pipeline and growth potential. It is also a shareholder-friendly company, which returns excess cash flow to investors through stock buybacks and dividends.

The only flaw for AbbVie is its valuation. The stock is up 50% year-to-date, which has elevated its price-to-earnings multiple, and also lowered its dividend yield. As a result, investors might want to wait for a lower price before buying the stock, but AbbVie remains a strong holding for dividend growth.

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